Racial Bias in Lending, Housing Draws High Court Inquiry

By Greg Stohr -
Oct 29, 2012

The U.S. Supreme Court signaled
interest in a case that could shield lenders from many race-bias
lawsuits, asking the Obama administration for its views on clash
over the demolition of a predominantly minority New Jersey
neighborhood.

The appeal by Mount Holly, New Jersey, asks the justices to
decide whether the U.S. Fair Housing Act authorizes suits even
without allegations of intentional bias. Lower courts have said
suits can instead claim that a government policy or a company
lending practice has a discriminatory impact.

The issue is potentially a timely one for lenders because
the Obama administration has repeatedly used the so-called
disparate-impact legal theory in pressing lawsuits against
banks. Over the last year, Bank of America Corp., Wells Fargo &
Co. (WFC) and SunTrust Banks Inc. (STI) have agreed to pay a total of almost
$500 million to settle claims.

“Defending allegations of disparate impact -- even if
proven to be meritless -- is typically very expensive,” five
lender trade groups, led by the American Financial Services
Association, argued in court papers urging the justices to
intervene.

The Supreme Court’s just-begun term may redefine the legal
protections for racial minorities. The court under Chief Justice
John Roberts already is considering rolling back university
affirmative action programs and may take up a challenge to a
central part of the 1965 Voting Rights Act.

The justices directed their request today to U.S. Solicitor
General Donald Verrilli, the administration’s top Supreme Court
lawyer.

Destroying Homes

The case stems from an effort by Mount Holly to redevelop
what it said was a blighted, high-crime area. Known as the
Gardens, the neighborhood was originally developed to provide
homes for returning World War II veterans and their growing
families. In more recent years, the Gardens was the only
predominantly black and Hispanic area in town, with 75 percent
minority residents in 329 residential units.

The town began buying homes in the Gardens, in most cases
paying between $30,000 and $50,000, until only 70 remained in
private hands. The redevelopment effort has since stalled, even
as the town has destroyed scores of homes and accumulated $18
million in debt. No new houses have been built, and the
remaining structures now form a patchwork amid vacant lots.

A group of current and former residents sued, claiming the
effort had a disparate impact on minorities. A federal appeals
court said the case could go forward.

Legitimate Activities

In its appeal, Mount Holly says the Fair Housing Act is
written differently than other discrimination statutes,
indicating that Congress didn’t intend to allow disparate-impact
claims. The town said government agencies shouldn’t be left
vulnerable to suits over non-discriminatory policies.

“Allowing disparate impact claims under the FHA would
render illegal many legitimate governmental and private
activities designed to promote the general welfare of the
community,” Mount Holly argued.

The suing residents urged the court not to hear the appeal.

“Where the courts of appeals are in broad and longstanding
agreement on an issue of statutory interpretation and Congress
has acquiesced in this interpretation for nearly 38 years, there
is simply no need for this court to weigh in on the meaning of
the statutory text,” they said in court papers.

The Supreme Court had agreed to consider the disparate-
impact issue in its last term, in a case involving St. Paul,
Minnesota. The city dropped its appeal in February, scuttling
the case.

Lender Gamble

Congressional Republicans have accused the Obama
administration of improperly inducing St. Paul to drop the case
-- to avert a Supreme Court decision limiting the Fair Housing
Act -- by promising to stay out of an unrelated fraud suit
against the city.

Although lending is governed by a different part of the
Fair Housing Act, the financial-services trade groups said a
high court ruling will probably affect both types of cases.

The banks’ stance is a risky one, says Tom Goldstein, a
Washington lawyer who represented a group of landlords suing St.
Paul under the Fair Housing Act in last year’s case. Goldstein,
whose Scotusblog website is sponsored by Bloomberg Law, said the
banks instead could have argued that the part of the law
covering lending precludes disparate-impact claims even if the
housing provision doesn’t.

‘Better Defense’

“Lenders may be making a grave mistake by embracing this
challenge,” Goldstein said. The lending provision “provides a
better defense than this one.”

The Fair Housing Act is one of a handful of statutes that
bar discrimination in financial services. Lenders have also
sought to stop disparate-impact suits under the Equal Credit
Opportunity Act, the law barring discrimination in all types of
lending.

The disparate-impact doctrine has drawn attention over the
past year because a new regulator, the Consumer Financial
Protection Bureau, adopted it. The CFPB, created by the Dodd-
Frank financial regulatory overhaul of 2010, handles enforcement
of the Equal Credit Opportunity Act.